SOCIAL SECURITY REFORM: THE COST OF DELAY

April 11, 2005

Social Security has collected surplus revenues since the last major reform in 1983. However, the money itself was spent on other federal programs and debt reduction, and was credited to the Trust Fund in the form of special government bonds.

Social Security is expected to collect more revenues than it pays out in benefits until 2016. Every year after 2016, Social Security will run a deficit, which, at the current tax rate, will grow each year.

What will be the magnitude of these annual claims on federal resources? The largest source of general revenue for the federal government is personal and corporate income taxes. Thus, a natural way to quantify the Trust Fund's claims on general revenues is in terms of federal income tax revenues, says Andrew J. Rettenmaier, a senior fellow and the executive associate director of the Private Enterprise Research Center at Texas A&M University.

Prior to the Trust Fund's exhaustion in 2041, Social Security will make growing claims on Treasury funds:

The largest previous transfer from the rest of the budget to Social Security amounted to 4.55 percent of federal income taxes in 1982, prior to the last major reforms in 1983.

By 2022 -- when only about half of the baby boomers born between 1945 and 1964 will have reached retirement age -- the transfers are projected to be about 5.5 percent of income taxes, higher than any previous transfers.

In 2041 alone, Social Security will claim $355 billion from the Treasury -- 14.3 percent of federal income taxes.

If the past is any indication, Congress will likely reform the program in some way well before 2041. The drain on federal revenues begins in 2017 and, more importantly, Medicare will also impose mounting pressures on the budget in coming years. Thus it is unlikely that Congress will even wait until 2022 to make reforms, says Rettenmaier.